Question 1

A person who has a constant marginal utility of income will be risk-averse.

Accepted Answer

A) True 
 B)False

Question 2

Economic growth that is not industry-specific is MOST likely to:

Accepted Answer

A)  have no effect on most businesses. 
B)  result in many businesses doing well. 
C)  result in many businesses not doing well. 
D)  affect only a few select businesses. 
A)  have no effect on most businesses. 
B)  result in many businesses doing well. 
C)  result in many businesses not doing well. 
D)  affect only a few select businesses.

Question 3

In which situation is adverse selection MOST likely to be a problem?

Accepted Answer

A)  buying tomatoes at the local farmers' market 
B)  hiring a new manager to work the night shift 
C)  buying a new lawnmower 
D)  buying a house directly from the previous owner 
A)  buying tomatoes at the local farmers' market 
B)  hiring a new manager to work the night shift 
C)  buying a new lawnmower 
D)  buying a house directly from the previous owner

Question 4

An efficient market for risk,such as an insurance market,is MOST likely to exist:

Accepted Answer

A)  when there is a level playing field so that all participants have approximately the same wealth and the same degree of risk aversion. 
B)  when the sellers of insurance are risk-averse but the purchasers are not. 
C)  when there are significant differences between individuals' wealth levels and attitudes toward risk. 
D)  in the presence of private,or asymmetric,information. 
A)  when there is a level playing field so that all participants have approximately the same wealth and the same degree of risk aversion. 
B)  when the sellers of insurance are risk-averse but the purchasers are not. 
C)  when there are significant differences between individuals' wealth levels and attitudes toward risk. 
D)  in the presence of private,or asymmetric,information.

Question 5

Mary and Bob are trying to decide how much auto insurance to buy.They share the same expectations of an accident,with the same dollar loss.They also have the same income levels.However,Mary would rather buy very little insurance,while Bob would rather buy much more insurance.This suggests that:

Accepted Answer

A)  Bob is more risk-averse than is Mary. 
B)  Mary is more risk-averse than is Bob. 
C)  Bob is risk-averse and Mary is risk-loving. 
D)  Mary is risk-averse and Bob is risk-loving. 
A)  Bob is more risk-averse than is Mary. 
B)  Mary is more risk-averse than is Bob. 
C)  Bob is risk-averse and Mary is risk-loving. 
D)  Mary is risk-averse and Bob is risk-loving.

Question 6

Use the following to answer questions :
Scenario: Diversification
Morris is considering investing $10 000 in a sunglass company or a rain poncho company.If it is a rainy year and he invests only in the sunglass company,he will lose $5 000.However,if it is a rainy year and he invests only in the rain poncho company,he will earn $10 000.If it is a sunny year and he invests only in the sunglass company,he will earn $10 000;if he invests only in the rain poncho company,he will lose $5 000 in a sunny year.There is a 50% chance of a sunny year and a 50% chance of a rainy year.
-(Scenario: Diversification)Use Scenario: Diversification.If Morris invests all of his money in the sunglass company,what is his expected gain or loss?

Accepted Answer

A)  a loss of $2 500 
B)  to break even 
C)  a gain of $2 500 
D)  a gain of $10 000 
A)  a loss of $2 500 
B)  to break even 
C)  a gain of $2 500 
D)  a gain of $10 000

Question 7

Risk-averse individuals are willing to pay a premium that is _____ their expected claims.

Accepted Answer

A)  less than 
B)  greater than or equal to 
C)  equal to 
D)  dependent on something other than 
A)  less than 
B)  greater than or equal to 
C)  equal to 
D)  dependent on something other than

Question 8

Use the following to answer questions :
Scenario: Health Costs
Alan is hoping for a healthy year,meaning that he would have zero health costs.Given his habits,there is a 40% chance that Alan will develop a health issue resulting in $50 000 in health costs.Assume these are the only two conditions that could exist for Alan in the coming year.
-(Scenario: Health Costs)Use Scenario: Health Costs.When Alan's probability of developing a health problem decreases,holding everything else constant,Alan's expected value of health care costs:

Accepted Answer

A)  increases. 
B)  decreases. 
C)  stays constant. 
D)  increases,decreases,or stays constant. 
A)  increases. 
B)  decreases. 
C)  stays constant. 
D)  increases,decreases,or stays constant.

Question 9

The future price of one share of General Motors stock is a random variable.

Accepted Answer

A) True 
 B)False

Question 10

Common strategies to deal with the problem of adverse selection include screening (using observable information to make inferences about private information),signalling (engaging in actions that reveal one's private information),and establishing a good reputation.

Accepted Answer

A) True 
 B)False

A person who has a constant marginal utility of income will be risk-averse.

Economic growth that is not industry-specific is MOST likely to:

In which situation is adverse selection MOST likely to be a problem?

An efficient market for risk,such as an insurance market,is MOST likely to exist:

Mary and Bob are trying to decide how much auto insurance to buy.They share the same expectations of an accident,with the same dollar loss.They also have the same income levels.However,Mary would rather buy very little insurance,while Bob would rather buy much more insurance.This suggests that:

Risk-averse individuals are willing to pay a premium that is _____ their expected claims.

The future price of one share of General Motors stock is a random variable.

Common strategies to deal with the problem of adverse selection include screening (using observable information to make inferences about private information),signalling (engaging in actions that reveal one's private information),and establishing a good reputation.

First Principles

Economic Models

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas

Elasticity

Taxes

International Trade

Decision Making by Individuals and Firms

The Rational Consumer

Behind the Supply Curve- Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Graphs in Economics

Consumer Preferences

Indifference Curve Analysis

Filters

Exam 20: Uncertainty, risk, and Private Information

A person who has a constant marginal utility of income will be risk-averse.

Economic growth that is not industry-specific is MOST likely to:

In which situation is adverse selection MOST likely to be a problem?

An efficient market for risk,such as an insurance market,is MOST likely to exist:

Mary and Bob are trying to decide how much auto insurance to buy.They share the same expectations of an accident,with the same dollar loss.They also have the same income levels.However,Mary would rather buy very little insurance,while Bob would rather buy much more insurance.This suggests that:

Risk-averse individuals are willing to pay a premium that is _____ their expected claims.

The future price of one share of General Motors stock is a random variable.

Common strategies to deal with the problem of adverse selection include screening (using observable information to make inferences about private information),signalling (engaging in actions that reveal one's private information),and establishing a good reputation.

First Principles

Economic Models

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas

Elasticity

Taxes

International Trade

Decision Making by Individuals and Firms

The Rational Consumer

Behind the Supply Curve- Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition

Externalities

Public Goods and Common Resources

The Economics of the Welfare State

Factor Markets and the Distribution of Income

Graphs in Economics

Consumer Preferences

Indifference Curve Analysis

Filters